When people ask me what the ramifications of foreclosure are, I answer with facts about deficiency judgments, tax consequences and ruined credit. Add to that the obvious trauma of losing their home, and there is no standpoint from which anyone can continue to view foreclosure as a good solution.
If you are a distressed homeowner, I urge you to read on.
Ramifications of Foreclosure: Are You Liable for Deficiency Judgment?
In a foreclosure, a lender takes your property and sells it at auction to recover unpaid mortgage debt. These days, the housing market is so deflated that sale prices are often much lower than the balance owed.
If this happens, you may have to pay the deficiency – the difference between the sale price and what you owe. If your home sells on the auction block for 150,000 and the original mortgage was 200,000, that’s $50,000 you will owe.
In Florida, lenders have the right to pursue borrowers for the deficiency balance. A deficiency judgment is a court order granted to the lender that makes you responsible for paying back this unpaid debt. You are personally liable for the amount of the judgment, and legally required to pay it.
Even worse, in Florida a lender can wait up to five years to seek a deficiency judgment – which means they can wait until you recover financially before going after your money.
Whatever your circumstances, if you are forced to sell your home for less than the amount you owe on it, including a short sale, there is a good chance that you’ll be involved in a deficiency judgment at some point.
Learn more about foreclosure and short sales in Florida.
Your “Forgiven Debt” May be Taxable Income
Let’s say the mortgage lender forgives your liability for the unpaid debt; there is no deficiency judgment against you. Depending upon your circumstance, this “forgiven debt” may be considered by the IRS to be taxable income to you.
There are provisions in place to protect distressed borrowers against this tax liability. The Mortgage Forgiveness Debt Relief Act of 2007 provides this umbrella of shelter, and is effective until 2012. The protection is limited to homeowners who have lost their primary residence. Many other specific stipulations apply. Be aware that not all homeowners are protected against getting hit with a tax bill for debt forgiveness.
You should consult with a knowledgeable tax advisor. Ask them specifically, what are the ramifications of foreclosure or a short sale to your tax situation. Have them take a good look at how each transaction will affect your financial status.
What are the Ramifications of Foreclosure to Your Credit Score?
A foreclosure will negatively impact your credit score, causing it to drop 100 points or more. A foreclosure will remain on your credit report for the next 7 years as public record. The actual damage to your credit score depends partly on your previous credit history.
There is a snowball effect that happens, causing more ramifications to your credit as a result of foreclosure. You will be in the “high-risk” category. Few lenders will be willing to risk approving you for loans, or you will be asked to pay a hefty down payment in order to be approved.
There can be penalties on the length of time (several years) until you can apply for and get a new mortgage. Landlords will check your credit records and may ask questions about your credit history.
Getting approved for credit cards will be difficult, and current credit cards may increase your interest rates.
Unfortunately, some homeowners have the misconception that avoiding foreclosure by conducting a short sale will keep their credit scores in tact. In the eyes of the credit bureau, both are major offenses.
There may be cases where the short sale does not do as much long-term damage to your credit rating. Every case is individually determined by the credit bureau’s scoring model. This is where seeking skilled advice is imperative.
What are other ramifications of foreclosure?
The damages that foreclosure brings upon a family are impossible to measure. Getting re-established in a new home or a rental home will be difficult. Have you made plans for coming up with the initial rental deposit and monthly rent after that?
The financial stress plus the emotional toll of leaving a familiar neighborhood behind and facing an unclear relocation may be the most difficult consequence of all.
If there is any way you can avoid foreclosing on your home, you should do so for your financial future. To counter all of these ramifications, there are legal and ethical solutions to avoiding foreclosure that the lenders do not want you to know about.
Please do not take any action until you contact me, Dillon Graham. Your most important step is to request our free Florida foreclosure assistance.